Estimating price and expenditure elasticities for select foods and drinks in South Africa using a demand systems model

TL;DR

This study estimates how sensitive South African consumers are to price changes for various foods and drinks, which can help inform health policies like taxes on unhealthy products.

Contribution

The paper provides the first estimates of price and expenditure elasticities for select foods and drinks in South Africa using a demand systems model.

Findings

Own-price elasticities range from −1.05 for packaged FVNS to −1.91 for low-sugar dairy drinks.

Lower-SES households are more price sensitive than higher-SES households.

Some goods are substitutes (e.g., 100% fruit juice and soft drinks), while others are weak complements (e.g., desserts and FVNS).

Abstract

South Africa implemented a Health Promotion Levy (HPL) on sugar- sweetened beverages in 2018 and has a draft regulation on front-of-package labeling for packaged foods containing excess sugar, sodium, or saturated fats. Estimates on price elasticities of demand for these products do not exist to date; the implications of expanding the HPL are thus unknown.

We employ a modified exact affine Stone index demand system model to estimate the expenditure and uncompensated own- and cross-price elasticities of demand for select foods and beverages in South Africa using purchase data from lower- and higher-SES households from January 2016 through March 2019.

We found own-price elasticities of demand ranging from −1.05 for packaged fruits, vegetables, nuts, and seeds (FVNS) to −1.91 for low-sugar dairy drinks, implying that a 10% rise in prices reduces the demand for these commodities by 10.5%–19.1%. Lower-SES South African households are generally more price sensitive. Some goods are substitutes (e.g. 100% fruit juice and other soft drinks) while others (e.g. desserts and FVNS) are weak complements.

The government may have room to raise and expand the HPL to further discourage consumption of these products and raise additional revenue, although the total effect would also depend on supply side responses, which we are unable to capture here.

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